петък, 27 юли 2012 г.

"Business models will be shattered ... companies will go bankrupt ... and
only certain players will emerge from the rubble ... It's going to be a new age
" Market Analysts

Question: The financial collapse in the euro area is not only inevitable, but
will happen soon. This rather startling conclusion is one of the first made in
the Manifesto of Survival, presented by the team of experts from Bulgaria, EU
and the US who participated in the first edition of Sofia's Business School.
Does this mean that a severe financial catastrophe comes next in the euro area?

Answer: We did not want to darken the colors too much, but the inertia observed
forced us to speak out. The Eurozone in its present form will not continue to
exist. I'm afraid that options for smooth or controlled transition have been
exhausted. Clearly, we are entering the endgame phase of the sovereign debt
crisis.

The European political elites have failed miserably and have only managed to
“kick the can down the road” and postpone the public acknowledgement of their
defeat. The European market leaders and
the public institutions do not enjoy anymore the trust and have lost the moral
high ground and social support needed to guide and control the process of creative
destruction and steer it into the mainstream of new growth pattern. In the
debate on the Manifesto during the SBS master classes the most shared view was
that the situation is gone from to worse to bad and nothing seems to too
radical in addressing both analytical and remedial action.. Unfortunately, the
economic theory in its present state does not seem to provide any clues on what
needs to be done. Mechanical Keynesianism is not a recipe - the problems arouse
from excessive public spending and deficits. More Keynesianism will only worsen
the situation. Therefore, any calls to stimulate economic growth through public
investments without underlying primacy of financial and fiscal discipline
remains a short cut to terminal disaster.

Question: Leading experts of the Sofia Business School predict that when the
crash happens, it will inflict unpredictable financial, economic and political
shocks. What in particular can be done in such turbulence?

Answer: It is beyond any doubt that for many Southern European countries, the
U.S. and even China the scenarios for a lucky exit from the crisis are limited.
The mismatch between the virtual and real economy and finances, the sheer scale
of the social and financial deleveraging needed to balance off the system are
mind boggling. It was not by accident that 15 years ago financial derivatives
were tagged as the new weapon of mass destruction. And the value destruction we
witness has not parallel in history.

The gap between
what the markets expect citizens to sacrifice in order to regain a balanced
status and what people are ready to offer is startling. And consumers and
taxpayers will have to foot the bill in any case. There is a growing consent
that Greece will need another 30 percent haircut on the debt, to reach a
sustainable level of servicing its debts and regaining its economic growth
trajectory. There is no sign of the Greek people being ready en masse to take the bitter pill and
rediscover the merits of hard work and fiscal discipline. The salvation en groupe depends on shared values ​​of teamwork, concerted action and survival instinct
driven sense of solidarity, which many countries of Southern Europe seem not to
possess. Reports that some banks in South Europe have ceased to acknowledge
letters of credit and bank guarantees from troubled countries is a poignant
marker of a doom. Recourse to “sauve qui
peut” action will make future coordinated financial rescue mission
obsolete.

During the exchanges at the master classes of the Sofia Business School it was
noted that Bulgaria enjoys certain advantages at the "entrance" of
the crisis, but the resilience buffer is insufficient. The difference with
Greece is very subtle; the Greeks entered at their will into debt which they
currently can’t service. The generated wealth in the process (regardless
whether done in a socially just way) will remain in the Greek national bounty
irrespective of the crisis outcome. A "cost-benefit" analysis might
even turn up in positive grounds given the consecutive debt haircuts. No
foreigner will take away the developed transport and urban infrastructure, the
industrial and financial and industrial assets acquired or generated in Greece
or abroad.

In a stark
contrast Bulgaria’s lower income levels lead to lower marginal cost of
stability in the banking and financial sector, including lesser belt tightening
to achieve balanced budgets and meet Maastricht criteria. The Bulgarian
companies, however, do not enjoy comparable access to credit tot that offered
by Italian, Spanish or Greek banks', which allow companies in the “troubled”
economies to restructure operations, write off in whole or in part NPLs and
retain their market share. Bulgarians have to equal access to EU funds, export
financing, insurance and subsidies, particularly in agriculture and food
industries, and in addition are restricted on labor mobility, etc.

Corporations, institutions and citizens in developed countries scan the crisis
environment for opportunities for new markets and growth potential. Bulgarian
institutions, companies and citizens typically feature lower degrees of
globalisation, which limits their scope of earliest possible identification of
risks and opportunities. The main culprit is the type of provincial globalism -
preached and practiced in the country over the past twenty years. Bulgaria has entered NATO and ever since has
ceased to upgrade the national capacity to independently assess and accommodate
old and emerging new military and terrorist threats. We have also entered the
European Union eyeing as the next step the EMU trusting that this will
ultimately underwrite the currency board.

We depend almost
entirely on foreign partners to alert us on conventional and non-conventional
threats in field of internal and external national security. We rely on foreign
investments and capital to drive our economic engine, generate wealth and
increase living standards. Compare this behavioral pattern with that of the
Dutch, Finns and Danes, Estonians and the Poles. The business and political
leaders of these countries do not look back when exploring for opportunities
and market risk diversification, visiting Asia, Africa and Latin America.

Q: Do you think
Bulgaria has a contingency plan to respond to this emergency – as according to
the Manifesto a mortal danger is ahead?

Answer: The threat is genuine and imminent and a contingency plan is long
overdue. Some of the steps should not be made public as they can easily cause
over-reaction - panic, despair or speculative moves etc. But the key elements
of this plan should be developed to match different risk levels -
institutional, corporate, social, financial etc.

First, we must assess the crisis impact and map areas of vulnerability.
Bulgarian institutions have failed to generate an independent, flexible and
diversified matrix and network connectivity. We are over reliant on
hierarchical linear or one dimensional relationship – with NATO, EU, EMU, the
IFIs, etc., underestimating the significance of the independent endogenous and
exogenous connectivity of Bulgarian individuals, corporations and institutions.
The result is that the Bulgarian "global network" linkages are
unevenly spread and matured. If the safety net has many deficiencies or
"loopholes" it wouldn’t be capable of dampening free falls and of
rebounding those in need.

Second, each crisis is specific and therefore treatment should be case and area
specific. In the wake of perhaps the most acute phase of the global financial
and economic turmoil what matters most is the quality of the crisis management
chest - the size and type of buffers - liquid and callable resources to react
(even at the cost of entering into new debt) and above all trimming
non-essential public spending. Any thrust to boost public investments in order
to reignite economic growth and reach monetary balances, except for essential
costs on critical social and economic systems and services, is a quantum leap
into the precipice. Not accidentally, countries, stuck in debt, support the
French initiative for greater union solidarity, thereby internationalising
costs and nationalising benefits.

In the hot phase of the collapse of the euro area crisis plans should involve
besides bank recapitalisation securing the free flow of credit to business and
household consumption and safeguards against critical deficits of energy
resources and strategic goods. Contingencies plans should also entail bail outs
of distressed banks, financial institutions and key companies, but solely in
exchange of equity. Temporary nationalisation is preferable to "rescue
deal" with easy taxpayers’ money coming to the rescue of rich shareholders
and covering up the flawed governance in private banks. On the other hand - the
government should closely monitor the state of its "open wounds" –
industrial and transport “prides” like BDZ, BEH, NEC, Bulgargas, healthcare and
pension systems, which could easily drain the public finances. Privatisation is
no instant cure - it requires a long term horizon. However crisis management
teams might prove more relevant. NPP "Belene" must be immediately
halted, because on its own it can financially suffocate the whole Bulgarian
economy.

Special treat should be given to currency risks, as a potential drop in the
value of the euro will instantly lead to reciprocal fall in the value of
euro-denominated assets. After a time lag currency depreciation potentially
adds to the competitiveness of the exports of goods and services outside the EU
market. Bulgarians can do little to nothing to reverse the course of the
history and the fall of the euro zone; but we can do a lot more to minimise
potential billion euro losses in asset value. The Bulgarian state has billions
in public assets with unaccounted for value that is absent from the public
books. In all events, contingency plans should be drawn and backed with
adequate human, financial, administrative, etc. resources as when the storm
hits there will be no time for reflective and extensive analyses. Just like in
blitz chess what matters most are home practised openings, intuition and
playing technique.

Question: If the bankruptcy scenario for Greek happens - and some leading
experts in fact believe, Greece is beyond salvation, do you think that Bulgaria
is capable of and has an efficient banking system, to soften the bruises that
ordinary citizens and their savings will incur in a financial meltdown?

Answer: It is believed that Greek banks were not a net contributor, but rather
a victim of the sovereign debt crisis. The fact is that their cross-border
expansion was largely made possible by the ability to issue euro debts and have
privileged access to virtually unlimited low interest euro supply. Technical
analysis suggests the most likely scenario for them will be a retreat and
consolidation in their Greek home base.

In the current situation the biggest challenge Greek banks face is to match
theirs means with their expanded asset base in CEE and Turkey and continue to
broker between large portfolio investors and the region. It is a mission
impossible under a uncontrollable exit from the Eurozone and a a return to the
drachma in one form or another. They might have to dispose of most of the
assets in the CEE in earnest and this might trigger tensions both in mainland
Greece and abroad. If Greek parental banks fail to secure access to short term
capital to enhance liquidity (in practice Greek banks rely for short term
financing only on the ELA) and long-term finance – an absolute must in
restructuring the economy, they will be driven crowded out of the region.

In Bulgaria we can’t remain indifferent to the fate of Greek banks in Bulgaria
and to their role in containing the crisis and restructuring the country. There
is no need to comment on whether the BNB and the government are ready to react
– they surely have contingency plans. One should always keep in mind, however,
that all of the European banks that recently defaulted or have sought bail outs
had successfully passed the rigid stress test using more restrictive risk
models. With few anchors of trust in the banking and financial systems, markets
have resorted to external intermediaries complementing banking supervision – as
is the case in Greece and Spain. Accounting standards have loop holes too,
suggesting the need for a continuous dynamic financial health monitoring
mechanism of banks.

Q: Experts like Professor Kevin Dowd and Gordon Kerr recommended – hardening of
the currency board, to make up for the weakening of the euro anchor, by pegging
to gold. Professor Nicholai Nenovski believes that the local currency might be
a better option to the euro. What does Bulgarian need to remain financially stable,
or at least be protected from head-on collision with debris in the euro area?

Answer: Monetary systems are quite complex and gold is no panacea, there is no
"silver bullet" type decision. Each country has a different risk
profile. Some solutions require more time and a detailed analysis of overall
and specific impacts, benefits and costs. The most practical way might be to
strengthen the euro anchor through partial conversion of CB euro reserves into
stronger world currencies and strategic goods asset that better uphold their
value better at times of crisis. A critical eye should be cast on the currency
structure of the debt - as there may lay a hidden potential for losses/gains in
value. I am sure that in this respect something is being done, but I'm not that
sure as to the merits of confining knowledge and expertise solely to the
government and the banks, and not sharing it with the public and private
sector, the NGOs and the citizens. The program directors of the the Sofia
Business School Professors Dowd and Nenovski have attracted top speakers who
will be asked to engage in analytical work in this area during the autumn and
winter editions of the SBS master classes.

Question: The Manifesto recommends as part of emergency measures, a
transitional currency board to protect the levs - what exactly should be done?

Answer: Hardening of the Bulgarian lev peg is a specific step - namely in the
aforementioned way - partial or interim replacement of the anchor – from solely
to the euro to a basket of strong currencies and strong strategic commodities –
such as gold, oil and gas (especially if we press on with on and offshore
exploration and production), foods etc.

Surely there will be objections, mainly on the short-term loss in price
flexibility and export competitiveness. Steep declines in the value of the
euro, however, would trigger much greater losses in the public and individual
wealth that the potential damage caused by worsened terms of trade. Family
silver protects value better than fiat money.

Here we only set
the framework of the issue. On the currency board hardening there is a clear
need for technical analysis and specific action plan.

Question: Now all eyes of the institutions and the public are fixed on the
security situation in Bulgaria following the terrorist attack in Burgas
Airport. As a diplomat, do you believe that Bulgarian foreign policy has given
some cause to foreign terrorist groups to launch this attack here and now?

Answer: Those who aim at finding a hidden reason for the attack and focus on
real or perceived flaws of Bulgarian diplomacy will always find the needle in
the haystack – be it in the hosting of the Syrian opposition meeting, or in the
numerous visits to Israel, or in the growing number of Israeli tourists or the
lack of "balancing" visit to Tehran. This of course is nonsense.
Bulgarian foreign policy should have a backbone and be able of withstanding
when confronted with grave security risks and challenges. However, engaging in
proactive diplomacy calls for a national consensus building on key foreign
policy objectives and communication mechanism securing essential public
support. An atmosphere of mutual recriminations and political attacks is hardly
conducive to balanced and lasting solutions. We need a professional and tacit
exchange on these national security issues.

The Bulgarian
security system might have some structural and strategic gaps. But they have
not happened overnight and are certainly not the deed of any single government.
Consecutive Bulgarian Governments have contributed to this stalemate pursuing a
policy of mechanical accession to NATO and the EU. Once in the NATO – the paradigm went –
security is automatically guaranteed – no need to invest in army or secret services.
Similarly, we thought that only once we enter the EU and economic growth and
prosperity will be bestowed upon us; no need for hard work and targeting non-EU
markets. This vicious momentum is so strong that that die hard supporters
enamoured with the Euro Zone continue to preach a quick entry, regardless of
the fact that it is breaking apart. This is a clear cut geopolitical myopia,
the cornerstone of a belief that there is no need for an elaborate and
independent Bulgarian national foreign policy on global issues, i.e. our new
partners will digest for us the risks and benefits of global environment and
provide ready made answer. Thus we set out to reduce defence and secret service
budgets, proclaimed that close integration between diplomatic and security
services is a bane and slashed MFA budget by nearly 50%. Now we totally rely on
American or Israeli authorities to alert us on pending attacks, and if, by
chance something goes wrong with their preemption we are helpless. Yet we have
our own counterintelligence, foreign and military intelligence / traditionally
strong in the Arab countries and among Islamists /.

My professional expertise as an ambassador, with specific coverage of terrorist
attacks involving Bulgarian citizens, unequivocally ascertains the autonomous
capacity of the Bulgarian diplomatic and special services to act in tandem in
saving human lives. One does not need any ideological clichés and caveats to be
able to work for national interests or to help people survive.

No matter how
significant might be the real or perceived security terrorist threat facing
Bulgaria, it could easily be dwarfed by self-inflicted injuries that political
squabbles and selfish interest groups can cause. A look at Romania would
suffice; the potential for discord and political uncertainty in Bulgaria in the
"eye” of the crisis is hard to ignore. A similar political all- out fight,
with no back track option and tons of political egos at stake is ravaging the
political landscape in Bulgaria. Therefore, the Consultative Council on
National Security should amongst other anti-crisis measures consider the issue
of extending the Currency Board into the political, financial and security
areas; before it is not too late.